Whether you are a sole proprietor, or own a small business, tax planning can and will save you time, money, and many headaches leading up to the deadline. Sound tax planning ensures that all deductions can be properly made, all credits can be claimed, and ultimately substantial amounts of money can be kept in the proverbial pockets of the business rather than the government.
Tax planning strategies differ from industry to industry due to different credits and amounts of income generated, but the core ideals of quality tax planning are relevant to almost every small business or sole proprietorship. Here is a look at a few of the golden rules relative to anytime tax planning, as well as some COVID-specific strategies.
Projections are important for businesses as they allow for planning in all aspects. Though they can also be great motivators, projections shouldn’t be confused with goals. Setting attainable goals for your business is just as important, from a motivational standpoint, but goals are generally something that is set with improvements in mind. Projections, on the other hand, should be based on company trends and financial data from years past.
Ultimately, these projections are as much for your tax preparation team (whether in-house or third-party) as they are for you, as these projections allows the team to start early when it comes to finding ways to reduce taxable income and budget correctly for the end of the year. A good rule of thumb is to base these projections on averages over the three previous years.
Decrease Taxable Income
Your tax team can inform you of potential budget strategies, but ultimately it is the business’s responsibility to plan their spending and receiving, and how you spend the latter can greatly affect your taxable income. If you have employees, things like their retirement plans and healthcare are not taxable income (generally), and neither are bonuses. In theory, parts of employee bonuses can be money that otherwise would have just been spent on taxes.
Differed contracts are another good example for decreasing taxable income, but it’s really just a shift method to put money “on the books” in a different year or quarter. This is where the projections mentioned above can really make things easier, in a sense that if you realize you’re set to make a lot more than projected in a given year, a differed contract can make sure that you stay close to your current projection and simply up next year’s knowing that the income from the deferred contract will be “waiting” for your team next year/quarter/etc.
Planning is all well and good, but as the world knows all too well, unforeseen things can, do, and will happen. The COVID-19 pandemic is as drastic and relevant an example as there has been in modern history. When things happen to your business, specifically the income of your business that are beyond the control of anyone involved and have also affected many other companies, history shows that help will be there for you, often in the form of tax breaks.
With COVID, for instance, the CARES Act incorporated the Paycheck Protection Loan for businesses to ensure they could continue paying their employees even when work was thwarted by the pandemic. Every dollar paid back to this loan (and often the case with similar programs) is non-taxable, thus taking some financial weight away in the future as income starts to be generated again.
Learn and Adapt
Every year tax planning should get easier, as lessons are learned and good habits take the place of the bad. The only constant in business is change, and revisiting these strategies and discussing tweaks with tax professionals can only benefit your business. But, as COVID has shown, nothing can be completely planned for and an ability to adapt is as important in the tax realm as it is to how you make your money.